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Oil Found in the Falklands – How will this Affect UK & Argentinean Relations?

Two hundred million barrels of oil is a drop in the ocean compared to the reservoir that produced the voluminous gusher of BP’s Gulf of Mexico oil spill. It is just 120 days’ worth of consumption in the UK or a mere 10 days of US consumption. But Rockhopper Exploration’s announcement in May that it had struck oil in the North Falklands region at the first drilled well threatens a bitter-sweet drama of its own for David’s Cameron new British administration.

The strike, the first in the Falklands Basin, could, according to the British Geological Survey, prove to be the first fruits for a region that could prove to be Britain’s new “North Sea.” Signs of an investor frenzy setting in have sent share prices rocketing. But the early find has already significantly ratcheted up tensions with Argentina – and talk of a second Falklands War.

The early strike in Rockhopper’s Sea Lion prospect saw its share price surge by 500 percent. It also led to, albeit more modest, jumps in the share price of its other British rivals, Desire, Arcadia and Argos, operating licensed tranches in the north Falklands Basin.

Operating the Ocean Guardian rig, Rockhopper hit a 175 foot-thick band of layered oil deposits, the thickest layer being 75 foot, after 20 days of drilling to a depth of 9,000 feet. After the initial announcement, the company confirmed the oil was of a “high quality reservoir interval with very good porosity and permeability” with “no oil/water contact encountered.” The company has a flow test for the prospect scheduled and is set to sink four more wells in the area.

A conservative estimate of reserves across the Falklands Basin suggests a minimum recovery of 3.5 billion barrels of oil. The estimate of the British Geographical Society suggests around 60 billion barrels, the equivalent of the UK’s North Sea deposits. Though such a figure, as some oil executives have told the UK’s Channel 4 News, may be an optimistic figure. Even so, with an additional assessment of 9 trillion cubic feet of gas deposits, the finds could prove transformational to Britain’s long-term debt problem; as well as making millionaire “oil barons” of the island’s 3,000 residents.

In February 2010, the UK’s then-Labour government agreed to take up to half of the revenues in the event of finding oil and gas. The Falklands Executive Council, only too aware of Argentina’s brooding language over reclaiming what they call “Las Malvinas,” indicated as long ago as 1994 their desire to make a more significant contribution to their own defense after the 1982 invasion. For Britain, it appears payback time for a sovereignty paid for in blood may have arrived. The economic yield to Britain from corporation taxes and royalties from the fields to the north of the Falklands alone could well be over $145 billion.

The recent campaign picks up where companies, including Shell, Lasmo (now part of Italy’s Eni-Lasmo) and Amerada Hess (now the Hess Corporation) of the US, left off after drilling six wells in 1998. Traces of oil were found in five of them and gas was discovered in the sixth. Only the global price crash, which sent oil prices down to $10 a barrel put a stop to the commercial viability of exploitation at that time.

But payback takes on a very different connotation for an Argentinian government and people plainly still passionate about reclaiming the Falklands – and the energy riches around them. Argentina is about to sink its own wells to the west of the island, outside what Britain claims are its territorial waters. When the Ocean Guardian was towed to the region in February this year, the Argentine government of Cristina Kirchner immediately warned it would take “adequate measures” to stop all British exploitation of the area.

Daniel Day-Lewis’s famously uttered the line “There will be blood!” in the quintessential oil film. Fears over whether Argentina’s strategic “measures” will run to that appear, for the moment, to have been allayed as President Kirchner’s government has apparently ruled out military action. While any economic harrying of British shipping – especially coupled with a worldwide slump in the oil price – could once again undermine the long-distance viability of exploitation for Britain, it is hard to see how Argentina’s diplomatic approach can succeed.

When in February it became clear that Britain would soon start drilling, the Argentine government lobbied hard to elicit support from both the United Nations and other South American countries to force Britain back to the negotiating table over sovereignty of the Falklands Islands.

In 2009, the government in Buenos Aires submitted to the UN its claim over a vast expanse of the Antarctic Ocean. The claim included the Falklands and its offshore environs. Argentina has also moved to impose shipping restrictions from her country’s ports to the islands. She has urged South American neighbors to follow suit. To date Argentina has received the backing of 32 Caribbean and Latin American countries, including Brazil, Mexico and, most vocally, from Venezuela’s Hugo Chavez and Nicaragua’s Daniel Ortega.

At Kirchner’s urging in March 2010, US Secretary of State Hillary Clinton, while declining a full mediation role for the US, offered to help resolve the issue in a “peaceful and productive way.” The offer was swiftly rejected by Britain whose governments have consistently re-stated that sovereignty over the Falklands is not up for negotiation. Former British shadow defence secretary, now UK Defense Secretary, Liam Fox – expressing the consensus view across the UK political divide – is unequivocal. Speaking in May ahead of the UK election Fox said, “No amount of intimidation” from Buenos Aires “could change the fundamental issue of self-determination.” Fox was alluding to the self-determination of the islanders who are almost exclusively of British descent, and who, as poll after poll shows, want to retain British sovereignty.

Congratulating Britain’s new PM David Cameron on his electoral victory in May, Argentina President, Cristina Kirchner, called on him to “halt all oil exploration in the ‘disputed’ waters around the Falkland Islands” in favour of “fruitful cooperation with my country.” But even with Britain’s military commitment in Afghanistan, it is not likely that an Argentina, undergoing a far more severe economic crisis than Britain, would be in any shape to take on a British Royal Navy largely unaffected by the UK’s land war in Asia.

Cutting Argentina in on a three-way deal over oil and gas revenues has been mooted as a possible compromise. However, such is the strength of Argentine public opinion, any administration that accepted anything less than reclaiming full sovereignty over the islands is unlikely to survive long.

Four British companies are now scheduled to begin drilling eight new wells off the Falklands before the year is out. Although it will be some time before any oil actually pumps, in the UK, penny share investors are already champing at the drill bit.

In the last year no fewer than 48 oil companies listed on the London Stock Exchange have seen their share prices double, with 17 seeing a threefold rise. Seven of these have, according to a report in Money Week, multiplied their shareholders’ investment five-fold. The hunt is already on for investors to call the next strike. Front-runners include Desire Petroleum and Rockhopper again, with Falklands Oil and Gas reporting at the end of May it had begun drilling off the East Falklands. Another strike and the oil investment frenzy will start in earnest.

And with Argentina’s economy in no shape to consider war, the only forces that could “top kill” Britain’s south Atlantic black gold bonanza appear to be market ones.

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